How to get to a Binding Deal

What comes before a contract

Whatever type of deal parties may be contemplating, there are usually a substantial number of terms to be agreed and which should be included in contracts, agreements or documents between the parties.  These documents are often not simple or standard and can take time, and careful consideration, before they are finalised.

This applies to all forms of commercial arrangements, ranging from real estate transactions, technology start-ups and investments, joint ventures and IT consulting and development arrangements, to name but a few random examples.

Pre-contract document

Parties will usually want to get the deal done and the paperwork signed as soon as possible but, as noted, this will take time.  In the interim, parties can, and usually should, prepare a form of preliminary document setting out their intentions and understanding of key points.

What’s in a name?

This document may, variously, be called:

  • Heads of Agreement (HoA);
  • Letter of Intent (LoI);
  • Memorandum of Understanding (MoU);
  • Term Sheet;
  • Deal Memo,

or some other name. We will refer to it as a HoA simply because that was the first name that occurred to us, but they are all names for the same sort of pre-contract document.

Non-binding/subject to contract

In almost every case, it should be very clearly expressed in the HoA that it is not legally binding and is to be subject to negotiation and execution of a formal contract, or contracts, and other necessary documents between the parties.  Most cases involving HoAs that come before Courts involve the question of whether or not a HoA is a binding contract.  Even if only expressed in summary form, a HoA can be a contract if the parties intend to be immediately bound, or if they act in a way that indicates that the HoA is binding, even if they also intend to have terms of agreement contained in a further contract or documents.

Having a non-binding document often gives rise to some angst for parties who want to have a deal “tied up” without delay. But, the safest course is nearly always to ensure that the HoA is not binding, as even if the parties think that the terms of the HoA are clear, they will not contain the detail or all of the terms of the final agreement or documents and, in the event of ambiguity or areas not covered, may lead to an interpretation that a party did not intend.

Can some terms be binding?

Some terms of a HoA can be binding and, if so, should be clearly expressed to be binding in the document.  Examples are:

  • confidentiality of information of parties (although this may be covered in a separate non‑disclosure or confidentiality agreement);
  • a period of exclusive negotiation;
  • requirements for exchange of information for due diligence or consideration.

Negotiation in good faith

Some HoAs contain a term which requires parties to negotiate in good faith to reach final agreement. Whether this is enforceable is doubtful, and such a clause may be viewed as merely an “agreement to agree”.  A Court will not make a contract for parties, even if there is such a clause.  A requirement to negotiate in good faith may, however, impose obligations to act honestly in the disclosure of information and in other ways in dealings between the parties.

The deal points

The main practical use of a HoA is to summarise and to have parties focus on the main commercial points of the intended deal.  This will, hopefully, mean that the preparation of the final and binding contract or documents is an easier exercise, even if this will still take time.  The existence of a HoA which does address the main issues will make it much easier to instruct lawyers, or other professionals, and to expedite completion of the final documentation.

Although a HoA may be non-binding it will usually be advisable for parties to refer this to lawyers, and other professionals if required, for consideration before it is finalised so that potential issues are addressed up-front in the HoA.

Negotiating and finalising contracts and documentation for commercial transactions can be a complex, time-consuming and sometimes frustrating experience for parties, but the preparation of a HoA which does cover the main points of agreement can greatly assist and expedite the process, and give the parties at least some comfort pending the finalisation of formal documents.

For more information, please contact:
Sandy Donaldson

Sandy Donaldson
Director
p.  +61 8 8124 1954
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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